‘Worst US Quarterly Earnings Since 2009’

The slowdown in the global economy and anaemic US recovery is expected to result in one of the worst US quarterly earnings seasons since late 2009.

John Foxx | Stockbyte | Getty Images

Analysts expect earnings for the period ended September to decline, the first negative result after 11 consecutive quarters of gains.

Energy and materials companies are tipped to lead the downturn with the financial sector set to be one of the few bright spots.

Wall Street analysts expect third-quarter earnings per share for S&P 500 companies will fall 2.7 percent versus the same quarter a year ago, according to FactSet. Just three months ago analysts had forecast growth of 1.9 percent.

In the past three months, warnings from large companies about reduced full-year profits due to global economic weakness fuelled this pessimistic view.

FedEx and UPS, often seen as barometers for world economic health, cut their full-year guidance during their last earnings releases, citing the slowdown in global trade.

In August, talking to the Financial Times, the chief executive of Caterpillar, bellwether of the industrial economy, warned of the greater uncertainty about global growth, predicting it could take another five years before Europe’s economy begins to grow.

Jeff Kleintop, chief market strategist at LPL Financial, said: “We expect corporate profits will be negative and revenues soft, as the global slowdown and below average economic growth in the US has affected companies.”

The earnings season starts with Alcoa reporting on Tuesday, followed byJPMorgan and Wells Fargo on Friday.

However, downbeat earnings expectations are yet to weigh on the broad market with the S&P 500 up more than 16 percent so far this year. Stock prices are being supported by the Federal Reserve buying large amounts of bonds, which lowers interest rates and boosts the attractiveness of riskier assets such as equities.

Earnings Pessimism Justified?

The "Squawk on the Street" news team dissects the biggest business headlines this morning, including earnings pessimism, new iPad mini rumors and more.

“If we see that the markets do not correct even after earnings disappoint and guidance gets worse, then it will be clear that fundamentals have given way to the Fed,” said Quincy Krosby, market strategist at Prudential Financial.

Equity investors are also looking beyond the most recent quarter toward the final quarter of the year given the expectation that profits will rebound. S&P 500 companies are on course for record cash profits for 2012.

That outlook may suffer from downward revisions should companies express caution about their future earnings in their results in the coming weeks.

“Even with lowered expectations, earnings could disappoint and place stocks under pressure,” said Michael Kastner, principal at Halyard Asset Management. “It’s worrying to see the warnings from Fed Ex and other weakness from the transport sector that suggests this will not be a good quarter.”

Financials are expected to be one of the few bright spots with analysts expecting earnings growth for the quarter of 10 percent according to FactSet.

Ahead of earnings season, companies tend to downplay expectations and look to surprise the market with better results.

“We expect more upside surprises in the third quarter, primarily because consumer health is in a good shape and with 80 percent of companies tied to consumers their earnings will be better than the consensus estimate,” said Phil Orlando, chief equities strategist at Federated.